The Cheesecake Factory Incorporated — Q2 2023 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 4, 2023, compared with the comparable periods ended June 28, 2022. Fiscal 2023 is a 52-week year ending January 2, 2024. The company operated 321 company-owned restaurants, including 211 Cheesecake Factory, 33 North Italia, 31 Flower Child and 37 other FRC locations, plus 30 internationally licensed Cheesecake Factory restaurants.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Revenue | $866.2 million | $832.6 million | +4.0% |
| Income from operations | $47.5 million | $27.9 million | +69.8% |
| Operating margin | 5.5% | 3.4% | +2.1 percentage points |
| Net income | $42.7 million | $25.7 million | +66.3% |
| Net margin | 4.9% | 3.1% | +1.8 percentage points |
| Diluted EPS | $0.87 | $0.50 | +74.0% |
For the first six months, revenue increased 6.5% to $1.732 billion, operating income increased to $81.4 million from $56.3 million, and net income increased to $70.7 million from $48.8 million. Six-month diluted EPS was $1.43 versus $0.96.
- Q2 comparable sales increased 1.5% at The Cheesecake Factory and approximately 8% at North Italia. Cheesecake Factory traffic declined 3.7%, offset by a 5.2% increase in average check.
- Food and beverage costs declined to 23.2% of revenue from 24.5%, while labor costs declined to 35.3% from 36.6%, reflecting pricing leverage relative to inflation.
- Preopening costs increased to $6.0 million from $2.9 million because of opening delays and related costs. Six-month preopening costs were $9.1 million versus $4.7 million.
- Q2 adjusted net income was $43.1 million and adjusted diluted EPS was $0.88, excluding impairment and lease-termination items and acquisition-related costs, net of tax.
Cash flow, debt and liquidity
- Six-month cash provided by operating activities was $101.5 million, compared with $87.5 million in the prior-year period.
- Capital expenditures were $62.7 million, including $37.8 million for new restaurants, $22.0 million for existing restaurants and $2.9 million for bakery and corporate infrastructure.
- Cash used in financing activities was $61.7 million, including $27.0 million of dividends, $21.7 million of share repurchases and $13.0 million of FRC acquisition-related payments.
- Cash and cash equivalents declined to $91.6 million at July 4, 2023 from $114.8 million at January 3, 2023.
- Long-term debt was $469.0 million, consisting primarily of $130.0 million outstanding under the revolving facility and $339.0 million net carrying value of the convertible senior notes. The notes have $345.0 million principal outstanding and mature in June 2026.
- The revolving facility provides total commitments of $400 million, with $238.5 million of net borrowing availability at July 4, 2023. The facility terminates in October 2027, and the company was in compliance with its financial covenants.
- Total operating lease liabilities were $1.371 billion, including $142.4 million current and $1.229 billion noncurrent.
Material changes and management commentary
- Revenue growth reflected higher comparable sales and new restaurant openings. The company opened five restaurants in the first six months, compared with two in the comparable prior-year period.
- Menu pricing increased average checks but contributed to lower traffic and unfavorable mix. Cheesecake Factory off-premise sales represented approximately 22% of restaurant sales versus 25% in Q2 2022 and 16% in Q2 2019.
- Management reported continuing commodity and wage inflation, supply chain challenges, staffing pressures and delays in permitting, construction, landlord readiness and equipment availability.
- The company repurchased approximately 0.6 million shares for $21.7 million during the first six months and had cumulatively repurchased 55.8 million shares for $1.787 billion through July 4, 2023.
- The board declared a subsequent quarterly dividend of $0.27 per share on July 27, 2023, payable August 29, 2023.
Guidance, outlook and risks
- Fiscal 2023 revenue is expected to be approximately $3.5 billion, with an estimated net income margin of approximately 4%.
- Management expects approximately $26 million of fiscal 2023 preopening costs and up to 20 new restaurants, including up to six Cheesecake Factory, five North Italia and nine other FRC restaurants.
- Fiscal 2023 capital expenditures are expected to be approximately $160 million to $170 million.
- Third-quarter revenue is expected to be approximately $835 million to $855 million, with a projected net income margin of approximately 2.75% at the midpoint. Commodity inflation is expected in the low-single-digit range and labor inflation in the mid-single-digit range.
- Key risks include consumer demand and traffic declines, inflation in food and labor costs, supply chain disruptions, staffing constraints, higher interest rates, delays in restaurant openings, lease obligations, debt covenant restrictions, commodity volatility, litigation and execution risks related to North Italia and the FRC concepts.
- The fair value of acquisition-related contingent consideration was $17.1 million at July 4, 2023, with an undiscounted modeled outcome ranging from zero to $276.0 million.
- A pending California wage citation had reached a tentative settlement subject to documentation and agency approval. The company stated that currently known legal matters are not expected to have a material adverse effect, although quarterly results could be affected by developments.
Investor verification points
- Verify whether comparable-sales growth can continue without relying on additional menu price increases that may pressure traffic.
- Monitor food, labor, occupancy and insurance costs against the company’s margin-recapture objectives.
- Assess progress toward the 20-unit opening target and the $160 million to $170 million capital expenditure plan, given historical opening delays.
- Review liquidity after dividends, share repurchases, capital expenditures and FRC acquisition-related payments, including the $2026 convertible-note maturity.
- Track compliance with revolving-facility covenants and the effect of variable interest rates; management estimates a 1% rate increase would raise annual interest expense by approximately $1.3 million.
- Evaluate the potential variability of acquisition-related contingent consideration and the company’s disclosed legal, privacy and wage-related matters.